MNI: China To Lower 2025 CPI Goal As Deflation Pressure Looms
MNI (BEIJING) - China's refreshed focus on inflation will see a likely reduction of its annual 3% CPI target to 2% at next month's National People's Conference, advisors and economists told MNI, noting the economy would still fail to meet the new objective.
The 3% CPI target did not represent reality, said Xu Hongcai, deputy director of the Economic Policy Committee at the China Association of Policy Science, adding 2% is more achievable and will likely remain as the future policy objective.
Authorities will unveil the new target on March 5 during the National People’s Congress. Beijing has not set an inflation target lower than 3% since 2004, despite the economy failing to achieve that level since 2012, with real inflation rising only by 0.2% y/y consecutively in 2023 and 2024, the lowest growth since 2009. (See MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI)
INFLATION OVER GDP
Authorities should prioritise 2% inflation over 5% GDP growth to help guide monetary policy, improve market expectations and boost demand, a policy advisor told MNI, adding the central bank should signal its intent to keep policy loose until it meets the target. (See MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market) Fiscal authorities should also adjust their spending to support household income from a focus on production, while the government’s efforts on GDP should shift from an over-reliance on manufacturing to the services sector, the advisor suggested.
The Central Economic Work Conference’s inclusion last year of "reasonable price recovery" as part of its economic goals had lifted the importance of inflation within economic policymaking, noted Yuan Haixia, a senior researcher at China Chengxin International, pointing to the 26 local governments that had recently lowered their inflation target to “around 2%.” However, persistently weak demand will keep inflation low, she predicted, noting a focus on services consumption over goods would do more to drag up CPI due to its more significant potential to expand.
Headline inflation increased by 0.5% y/y in January driven largely by Chinese New Year, beating expectations, but still weaker than the seasonal average of 1.1%, with services the major contributor.
WEAK PRICES
CPI growth will likely remain below 1% y/y in 2025 – the measure has failed to rise above that level since March 2023 – while deflation pressure will weigh on PPI, Xu estimated.
Li Xuezhi, a macroeconomic policy analyst, predicted inflation would likely print between 0.5-1.5% this year. Many industries are in a state of oversupply, leading to a general decline in durable goods prices, while some sectors are experiencing intense competition with price wars increasingly common, Li warned, pointing to the automobile market. The increase in the money supply may not stimulate demand but could drive production expansion, he warned, noting price declines could occur should output eclipse money supply increases.
Authorities must do more to boost confidence and support consumption and investment, including a further reserve requirement ratio cut, Xu said, adding President Xi Jinping’s recent meeting with entrepreneurs had delivered a positive signal to the private sector. However, Beijing also needs to focus on increasing incomes, which would require a series of reforms, he argued.